Probability Concepts: CFA® Level 1 Exam Preparation

Probability Concepts

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Question

Which of the following is true regarding probability?

I. 0 < P(E) < 1: the probability of an event E is a number between 0 and 1, exclusive.

II. The sum of the probabilities of any group of mutually exclusive events equals 1.

III. 0 <= P(E) <= 1: the probability of an event E is a number between 0 and 1, inclusive.

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A. B. C. D.

A

III only is true: 0 &lt;= P(E) &lt;= 1: the probability of an event E is a number between 0 and 1, inclusive. A probability can equal 1 or 0; thus, statement I is false.

Statement II would only be true if it read: The sum of the probabilities of any group of mutually exclusive and exhaustive events equals 1. Throwing a 6-sided die can lead to 6 different outcomes, each of which has probability of 1/6. However, If your group of mutually exclusive outcomes only included results 1 and 2, then the sum of those probabilities is not 1. Such a group would not be exhaustive because it excludes the outcomes 3, 4, 5, 6.